Air India privatisation will 'perk up' the country's aviation sector

Air India has debts of close to $8 billion and lost lost more than 36 billion Indian rupees in the financial year ending March 2017. Daniel Berehulak / Getty Images

With the Indian government drawing closer to the privatisation of its debt-laden flag carrier Air India, the move could signal a boost for the airline and the aviation market of Asia's third largest economy.

“Under privatisation, a new stronger player which has more commercial focus and is more efficient in its operations will probably perk up the entire market,” says Paramprit Bakshi, the vice president at Capa India, an aviation advisory. “Airlines will have to up their game.”

The airline - sometimes referred to as “the maharajah” because of its endearing, portly mascot - is burdened with debts of close to $8 billion. Taxpayers have been keeping the carrier afloat, as it guzzles hundreds of millions of dollars of their money each year.

An Air India spokesman said via email the company had “no comments on this issue”.

There is some optimism among experts that a suitable bidder will step in and be able to turn around the business, which lost more than 36bn Indian rupees (Dh1.98bn) in the financial year to the end of March 2017.

“The brightest spot is the consumption story of the aviation industry in India, with high growth rates like you've never seen,” says Sanjiv Bhasin, the executive vice president of markets and corporate affairs at IIFL, a finance and investment services company headquartered in Mumbai. “I definitely think there would be a very good suitor, despite the hurdles that have to be cleared such as the debt. The government ran Air India as a white elephant, but the fundamentals of the business are extremely strong.”

He adds that the airline “can be a very profitable company in the future” following privatisation.

It is seen as a bold move by the Indian government to sell off a stake in the airline. New Delhi announced the plan last year, admitting that funds could be better spent on areas including education. But it has not been an easy journey. Last week, India's ministry of civil aviation revealed plans to extend the deadline to receive initial bids for the carrier from May 14 to May 31, with plans to announce the qualified bidder on June 15.

Further details were revealed in March to sell off a 76 per cent stake in Air India. As part of the deal, the successful bidder would take on more than $5bn of the carrier's debt. Following this, India's largest airline IndiGo, which had earlier expressed keen interest, dropped out of the race.

Last month, Jet Airways - in which Etihad Airways has a 24 per cent stake - also announced it would not be bidding. Meanwhile, other companies have gone quiet, with none expressing an open interest in buying into the loss-making airline.

Taking over Air India could give a company “a significant opportunity” to get access to slots and bilateral rights in one of the world's fastest growing aviation markets, says Mr Bakshi. This should result “in significant interest” from bidders in a business that “has a lot of inherent value”, he adds.

With rising middle class incomes and cheaper fares, more and more Indians are taking to the skies, in a country where only a tiny fraction of the 1.3 billion population currently travels by air. Domestic air passenger traffic in India grew by close to 18 per cent in January compared to a year earlier, marking 41 consecutive months of double-digit growth, according to the International Air Transport Association.

Satish Modh has three decades of experience in aviation and worked on a turnaround plan for Air India before becoming the director of the VES Institute of Management Studies and Research in Mumbai. He believes that with the right investor, Air India can be restored to its former glory. He points to the examples of British Airways and Air Canada as success stories when it comes to privatisation.

Mr Modh says that “everything is in place”, including “a good network and skilled employees” and that “what the airline is suffering is real financial strength because of the legacy of bad decisions of previous governments and bad management”.

But a buyer with “good financial strength can take care of these issues”, he explains.

The airline has a fleet of 126 aircraft, plus three on order, with an average age of eight years. According to Planespotters.net, it flies to about 70 domestic destinations and 40 international destinations.

However, with new carriers launching in India in recent years. India's aviation market has become fiercely competitive.

As a result, Air India's market share has fallen to about 13 per cent compared to 35 per cent just over a decade ago. It means an investor will have their work cut out for them.

There are broader benefits, though.

With the government offloading Air India, this will allow it to focus on improving other areas of the aviation market, says Mr Bhasin. That, he says, includes developing airport infrastructure, which would benefit the industry and ultimately the broader economy.

“Why should the government focus on being in a business where they're not making money?” he says. "The sale of Air India could give the government more confidence to privatise other public sector companies. This could set the standard of getting out of assets where the government does not need to be.”

The process is open to a variety of potential buyers, with foreign airlines having the option of buying up to 49 per cent in Air India. Tata, the Indian conglomerate that owns Jaguar Land Rover and has interests spanning from steel to retail, is understood to be considering investing in the state carrier.

This would see the airline coming full circle.

Air India was set up by JRD Tata, the group's founder, in the 1930s when it was known as Tata Airlines before it was nationalised more than 20 years later

Tata already has a significant presence in India's aviation sector via its joint partnership with Singapore Airlines in the Indian carrier Vistara and a tie-up with Malaysia's AirAsia in AirAsia India.

Not everyone is looking forward to the privatisation of Air India, however. Trade unions have staged protests against the move, amid concerns that a private player is likely to trim the airline's bloated staff numbers.

One pilot for the airline, based in Mumbai, who spoke on the condition of anonymity, says he is not worried about losing his job, but explains that many other staff members, including cabin crew, are concerned

“For pilots like me it should be okay because they've invested in training them and it takes time to find people with those skills,” he says. “But others are very worried. They don't know if they'll have a job once the airline is sold off.”